Netgear 2013 Annual Report Download - page 21

Table of Contents
source suppliers on a purchase order basis. In addition, some components that are used in all our products are obtained from limited sources. These
components include connector jacks, plastic casings and physical layer transceivers. We also obtain switching fabric semiconductors, which are used in
our Ethernet switches and Internet gateway products, and wireless local area network chipsets, which are used in all of our wireless products, from a
limited number of suppliers. Semiconductor suppliers have experienced and continue to experience component shortages themselves, such as with
substrates used in manufacturing chipsets, which in turn adversely impact our ability to procure semiconductors from them. Our third-
party
manufacturers generally purchase these components on our behalf on a purchase order basis, and we do not have any contractual commitments or
guaranteed supply arrangements with our suppliers. If demand for a specific component increases, we may not be able to obtain an adequate number of
that component in a timely manner. In addition, if worldwide demand for the components increases significantly, the availability of these components
could be limited. Further, our suppliers may experience financial or other difficulties as a result of uncertain and weak worldwide economic conditions.
Other factors which may affect our suppliers' ability to supply components to us include internal management or reorganizational issues, such as roll-
out
of new equipment which may delay or disrupt supply of previously forecasted components. It could be difficult, costly and time consuming to obtain
alternative sources for these components, or to change product designs to make use of alternative components. In addition, difficulties in transitioning
from an existing supplier to a new supplier could create delays in component availability that would have a significant impact on our ability to fulfill
orders for our products.
We provide our third-
party manufacturers with a rolling forecast of demand, which they use to determine our material and component
requirements. Lead times for ordering materials and components vary significantly and depend on various factors, such as the specific supplier, contract
terms and demand and supply for a component at a given time. Some of our components have long lead times, such as wireless local area network
chipsets, switching fabric chips, physical layer transceivers, connector jacks and metal and plastic enclosures. If our forecasts are not timely provided or
are less than our actual requirements, our third-
party manufacturers may be unable to manufacture products in a timely manner. For example, in the first
quarter of 2013, our third party manufacturers were not able to manufacture sufficient quantities of our new line of ReadyNAS products in order to meet
demand, adversely affecting our profitability for the quarter. If our forecasts are too high, our third-
party manufacturers will be unable to use the
components they have purchased on our behalf. The cost of the components used in our products tends to drop rapidly as volumes increase and the
technologies mature. Therefore, if our third-
party manufacturers are unable to promptly use components purchased on our behalf, our cost of producing
products may be higher than our competitors due to an oversupply of higher-
priced components. Moreover, if they are unable to use components ordered
at our direction, we will need to reimburse them for any losses they incur.
If we are unable to obtain a sufficient supply of components, or if we experience any interruption in the supply of components, our product
shipments could be reduced or delayed or our cost of obtaining these components may increase. Component shortages and delays affect our ability to
meet scheduled product deliveries, damage our brand and reputation in the market, and cause us to lose sales and market share. For example, component
shortages and disruptions in supply in the past have limited our ability to supply all the worldwide demand for our products and our revenue was
affected.
Another example relates to the record flooding in Thailand in the third quarter of 2011. Many major manufacturers of hard disk drives and their
component suppliers maintain significant operations in Thailand in areas affected by the flooding. These include most, if not all, of our direct and
indirect suppliers of hard disk drives for our ReadyNAS product line. All of our major direct and indirect suppliers of hard disk drives informed us that
our supply chain would be constrained for an indefinite amount of time, in some cases up to six months. Some therefore declared a force majeure event
and have stated that, in addition to and because of the supply constraints, pricing for hard disk drives would increase significantly until they were able to
stabilize the situation. As a result, we experienced increased prices in the cost of hard disk drives and ceased accepting any additional orders containing
ReadyNAS products with hard disk drives at then current prices and all shipments of ReadyNAS products with hard disk drives were placed on hold. In
addition, all sales and marketing promotions involving ReadyNAS products were terminated temporarily. Further, we declared the existence of a force
majeure event under our contracts with certain customers. Accordingly, our business was harmed. Certain events or natural disasters that occur in the
future may harm our business as well.
If we lose the services of our Chairman and Chief Executive Officer, Patrick C.S. Lo, or our other key personnel, we may not be able to execute
our business strategy effectively.
Our future success depends in
large part upon the continued services of our key technical, sales, marketing, finance and senior management
personnel. In particular, the services of Patrick C.S. Lo, our Chairman and Chief Executive Officer, who has led our company since its inception, are
very important to our business. We do not maintain any key person life insurance policies. Our business model requires extremely skilled and
experienced senior management who are able to withstand the rigorous requirements and expectations of our business. Our success depends on senior
management being able to execute at a very high level. The loss of any of our senior management or other key research, development, sales or marketing
personnel, particularly if lost to competitors, could harm our ability to implement our business strategy and respond to the rapidly changing needs of our
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